Maryland Journal of International Law

Volume 3 | Issue 2 Article 3

Choice of Forum and Choice of Law Clauses inInternational Commercial AgreementsGeorge A. Zaphiriou

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Recommended CitationGeorge A. Zaphiriou, Choice of Forum and Choice of Law Clauses in International Commercial Agreements, 3 Md. J. Int'l L. 311 (1978).Available at: http://digitalcommons.law.umaryland.edu/mjil/vol3/iss2/3

CHOICE OF FORUM AND CHOICE OF LAW CLAUSESIN INTERNATIONAL COMMERCIAL AGREEMENTS

George A. Zaphiriou*

The initial concern when drafting a transnational agreementis to determine first, the forum for resolving disputes related to theagreement, and secondly, the law governing its validity, interpre-tation and performance. Preselection of forum and of law providereasonable predictability of the law that will be applied in theevent of a dispute. In modern-day drafting, rights and obligationsare generally specified within the written agreement, yet, this doesnot dispense of the need for a choice of law clause. Rights andobligations, even if detailed, cannot be construed in a vacuum.The chosen law will determine their validity and effect and theforum selected by the parties will ensure that their choice of law isupheld and applied. Forum as used here includes courts andarbitral tribunals or processes. The arbitration clause is in effect aspecialized kind of choice of forum clause.1

Forum selection and choice of law will vary depending uponwhether the contract is a government contract or a contractbetween enterprises. The former raises questions of sovereignimmunity and service of process. It may also preclude the choiceof a particular law as well as the submission to a particular courtor to arbitration. The present article is concerned with privatetrade rather than public trade or investment. It generally relatesto business contracts for the sale, use or carriage of goods, for thetransfer of technology, for the acquisition of business enterprises,for services, or for construction work. The purpose of this article isto focus on the trends in English, American and EuropeanCommunity law as to choice of law and choice of forum clauses.Special reference will be made to the Draft Convention betweenthe United Kingdom and the United States on the ReciprocalRecognition and Enforcement of Judgments in Civil Matters.2

Certain clauses of the Convention reflect the trend in the Anglo-American approach to choice of law and choice of forum clauses.

*Illinois attorney; Barrister, London, England; Advocate of the Supreme

Court of Greece; Panelist on panel of arbitrators of the American ArbitrationAssociation.

1. Scherk v. Alberto-Culver Co., 417 U.S. 506, 519 (1974).2. The Convention is found in 16 I.L.M. 71-87 (1977).

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The Convention has been initialed by the two delegations and willbe submitted to the United States Senate for its advice andconsent.

I. THE ANGLO-AMERICAN APPROACH

A. Choice of Law Clauses

The weight of precedent in the United Kingdom favors freechoice of the law governing the parties' contractual obligations. In1939, Vita Food Products v. Unus Shipping Co. 3 went so far as todecide that if the parties choose the law of a particular state, thatstate need not be connected with the transaction. The case dealtwith the carriage of goods from Newfoundland to New York. Thebill of lading which was issued in Newfoundland providedexpressly that English law was to govern. The question waswhether a certain exception clause in the bill of lading exemptingthe carrier from liability was valid. The Newfoundland Carriageof Goods by Sea Act of 1932 and the United States Carriage ofGoods by Sea Act of 19364 were enactments of the Hague Rules.The Rules represent a codification of certain regulations applica-ble to bills of lading. They provide for minimum standards ofliability imposed on a carrier of goods by sea. Clauses in a bill oflading which attempt to relieve the carrier from liability beyondthe minimum standards are held to be void. Practically everycountry in the world has embodied the Hague Rules into itslegislation.

According to both the Newfoundland Carriage of Goods bySea Act of 1932 and the United States Carriage of Goods Act of1936, the exception clause in the particular bill of lading wouldhave been void. The Judicial Committee of the Privy Council heldthat English law was to govern. The English Carriage of Goodsby Sea Act of 1924 (also an enactment of the Hague Rules) wasapplied, according to an express provision therein, only tooutgoing United Kingdom shipments. The exception clause wasthus declared valid.

The decision led to the odd result that a shipment of goodsfrom a state which had adopted the Hague Rules to another statealso adopting them escaped their application. Regrettable as theoutcome may be, it illustrates in no uncertain terms the extremeposition that the Court took on choice of law by the parties to a

3. [1939] A.C. 277.4. Carriage of Goods by Sea Act, 1936, 46 U.S.C. § 1300 et seq. (1970).

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contract. Although decisions of the Judicial Committee of thePrivy Council are only persuasive and not binding, English lawfollowed the precedent. The words of Lord Wright that the lawchosen by the parties is conclusive provided it is "bona fide andlegal,"' 5 generally represents the law of the United Kingdom. 6

The position under United States law is not as extreme.American law, unlike English law, has traditionally objected tothe concept that the express or implied intention of the partiesdetermines the law governing their contractual obligations.7 Morerecent developments, however, as expressed in the UniformCommercial Code § 1-105(1) and in the RESTATEMENT (SECOND)OF CONFLICT OF LAws § 187 (1971) acknowledge choice of law bythe parties provided there is a reasonable relationship between thestate whose law was chosen and the transaction. The UniformCommercial Code refers to "state[s] or nation[s]" and lays down aprinciple applicable both to interstate and transnational conflicts.Rules in the Restatement relate to interstate conflicts but logicallythe same rule would apply in this context to transnationaltransactions.8 Thus, the more recent tendency in the United Statesis to refer to the connection between the parties and/or thetransaction, and the state whose law the parties chose. InEngland, the relationship between the transaction and the lawrather than the state is preferred. For the most part, thedistinction is without significance but in some cases submission toa neutral jurisdiction or arbitration creates a connection with aparticular legal system. 9 In East-West trade, it is common practiceto submit disputes to arbitration in Sweden and to provide thatSwedish law governs even though the transaction is entirelyunconnected with Sweden. 10

Whether some connection is required between the parties, thetransaction, and the chosen law, is to a great extent academic. Inmost cases the parties will choose a legal system which isconnected with either of them, with the transaction, or with the

5. [1939] A.C. at 290.6. A. DICEY & J. MoRRIs, THE CONFLICT OF LAws 728-732 (9th ed. 1973); R.

GRAVESON, CONFLICT OF LAwS 419-434 (6th ed. 1969).7. J. BEALE, THE CONFLICT OF LAWS 1079-80 (1935); E. Gerli & Co. v. Cunard

S.S. Co., 48 F.2d 115 (2d Cir. 1931).8. A. LOWENFELD, INTERNATIONAL PRIVATE TRADE § 4.22 (1975).9. See Tzortzis v. Monark Line, A/B, [1968] 1 W.L.R. 406, where submission of

a contract for the sale of a ship to arbitration in London was held to amount to anexpress selection of English law as the proper law of the contract.

10. Holtzman, Arbitration in East-West Trade, 9 INT'L LAw. 77 (1975)..

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court that was chosen to determine future disputes. The require-ment of some association raises the further problem of howsubstantial it must be. Is the fact that insurance or financing wassecured in a particular place sufficient to create a connection eventhough neither insurance nor finance is directly at issue? In VitaFood," Lord Wright referred to the fact that the underwriters whoinsured the risk were likely to be English and this to some degreeinfluenced the result.

While the United States evolved toward an acceptance of theproper law of the contract to be determined according to theexpress or implied choice of the parties provided there isreasonable relationship with the transaction, English law made asmall concession to the law with which the contract is mostsubstantially connected. It is now conceded that the partiescannot by an express choice of law evade the mandatoryprovisions of the law with which the contract has the mostsubstantial connection. 12 Nevertheless, this is by no means asurrender to the so-called objective proper law. The strength of thelaw which was chosen by the parties is illustrated by the decisionin Tzortzis v. Monark Line, A/B. 3 It was there held that acontract for the sale of a ship which provided for arbitration inLondon was to be governed by English law even though thecontract was most substantially connected with Sweden. LordDenning, M.R., who has been a proponent of the objective properlaw formulated the rule as follows:

It is clear that if there is an express clause in a contractproviding what the proper law is to be, that is conclusive inthe absence of some public policy to the contrary. But wherethere is no express clause it is a matter of inference from thecircumstances of the case.14

The application of the law with which the contract is mostsubstantially connected, in case of evasion of its mandatoryprovision, is supported by the Draft United Kingdom-UnitedStates Convention on the Reciprocal Recognition and Enforce-

11. [1939] A.C. at 291.12. Boissevain v. Weil, [1949] 1 K.B. 482 (C.A.) per Denning, L.J.; In re Helbert

Wagg & Co., Ltd., [1956] 1 Ch. 323, 341; The Fehmarn, [1958] 1 W.L.R. 159, 162(C.A.), Lord Deening, M.R.; A. DICEY & J. MoRRis, supra note 6, at 730.

13. [1968] 1 W.L.R. 406.14. Id. at 411.

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ment of Judgments in Civil Matters. Article 8(d) of the Conventionprovides as follows:

If the defendant or his successor in interest so requestsrecognition or enforcement of a judgment is not required bythis Convention: . . . (d) where, under the rules of privateinternational law of the court addressed, its own law wouldhave been applicable to the case if it had been brought inthat court and the judgment disregards provisions of thatlaw which would have been applied by that court even if theparties had chosen another system of law; ....

The effect of the provision is that the court where the judgment issought to be recognized or enforced (i.e., the court addressed) mayrefuse to recognize or enforce, at the request of the defendant, ajudgment applying the law chosen by the parties to govern theircontract, under circumstances which, according to the conflict ruleof the court addressed, would require application of its own law asthe law with which the contract is most substantially connected.Thus, if an English court applied English law to a contract whichcontained an express choice of English law, but which wassubstantially connected with New York, thereby avoiding theapplication of a mandatory provision of the Securities ExchangeAct of 1934, for example, a court in the United States would beentitled under the Convention, at the request of the defendant, torefuse to recognize or enforce the English judgment.

B. Choice of Forum Clauses

English courts have been traditionally inclined to acceptjurisdiction pursuant to a choice of forum clause. The authorknows of no case in which an English court rejected the parties'submission on the ground that it was not a convenient court. InScotland,15 however, as in the United States, a court may declinejurisdiction in favor of a more convenient court.16

The courts in the United Kingdom will generally refrain fromexercising jurisdiction in derogation of a choice of forum clausesubmitting disputes to the exclusive jurisdiction of a foreign court.

15. The Atlantic Star, [1973] 2 W.L.R. 795, 810 per Lord Wilberforce; Socitk derGaz de Paris v. Armateurs Francais, (1926) S.C. (H.L.) 13; Ewing v. Orr Ewing, 10App. Cas. 453; Argyllshire Weavers, Ltd. v. Macaulay (Tweeds), Ltd., (1962) S.C.388.

16. See RESTATEMENT (SECOND) OF CONFLICT OF LAws § 84 (1971).

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They will hold the parties to their bargain, unless it can be provedthat trial by the foreign court would, under the circumstances, beinequitable or unjust.

In The Fehmarn,17 a 1958 decision, the Court of Appeal didnot find this general rule to be applicable. An English companyhad received turpentine from a Russian foreign trade organizationat an English port on a German ship. The bill of lading providedthat all claims and disputes were to be adjudicated in the U.S.S.R.Upon its arrival in England, the turpentine was tested and foundto be contaminated. The trade organization brought an action inEngland. The German shipowner applied for a dismissal oralternatively for a stay of proceedings. The judge of first instancefound that he had admiralty jurisdiction and refused to exercisehis discretion to stay the action finding that on a balance ofconvenience the case should be tried in England. 8 The witnesseswere more readily available there and there was no conceivablereason for the case to be tried in Russia. It merely appeared to bean attempt by the shipowners to make matters difficult for theplaintiffs. The decision of the court of first instance wasunanimously upheld by the Court of Appeal.' 9

The decision in The Fehmarn was reconsidered several yearslater by the Court of Appeal in Unterweser Reederei G.m.b.H. v.Zapata Off-Shore Co. (The "Chaparral").20 The same judge whohad delivered the judgment in The Fehmarn, since elevated to theCourt of Appeal, stated the rule as follows, 'The question iswhether sufficient circumstances have been shown to exist in thiscase to make it desirable, on the grounds of balance ofconvenience, that proceedings should not take place in thiscountry."'21

Thus, the English court instead of applying a doctrine offorum non conveniens in the American sense, 22 i.e., to declinejurisdiction conferred by a choice of forum clause, reserved toitself the discretion to exercise jurisdiction contrary to a clausewhen convenience so demands.

17. [1958] 1 W.LR. 159 (C.A.).18. [1957] 2 All E.R. 707.19. [1958] 1 W.L.R. 159 (C.A.).20. [1968] 2 Lloyd's List L.R. 158 (C.A.); See as to the facts Bremen v. Zapata

Off-Shore Co., infra at xx.21. Lord Justice Willmer at 163.22. See supra note 16.

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In a later decision, known as The Eleftheria,2 3 the Englishjudge stayed an action which was brought contrary to a clausesubmitting disputes to the Greek courts on the ground that theplaintiffs had not discharged their burden of proving a strongcause not to stay. The judge said that the following mattersshould be taken into consideration in the exercise of the court'sdiscretion to stay: (1) the country in which the evidence is to befound and its effect on the expense and convenience of the trial;(2) the law to be applied and its difference from English law inany material respects; (3) the countries with which the parties areconnected and the closeness of the connections; (4) whether thedefendants genuinely desire trial in the foreign country or areonly seeking procedural advantages; (5) whether the plaintiffswould be deprived by having to sue in a foreign court because theywould: (a) be deprived of security for that claim, (b) be unable toenforce any judgment obtained, (c) be faced with a time-bar notapplicable in England, or (d) for political, racial, religious or otherreasons be unlikely to get a fair trial.

The pendulum, however, seems to have continued its momen-tun away from the general jurisdictional proposition as evidencedin the more recent decision of Evans Marshall & Co., Ltd. V.Bertola S.A. 24 The case concerned an alleged premature termina-tion of an agency and dealership agreement. The defendantprincipal was in Spain and the plaintiff dealer was in England.The dealership agreement provided that disputes would besubmitted to the Barcelona Court of Justice. The plaintiff appliedto the Court for leave to serve notice of the writ outside thejurisdiction. Order 11 Rule 1 of the Rules of the Supreme Court ofJudicature states the situations in which a court may at itsdiscretion grant leave for service of the writ outside thejurisdiction. Order 11 Rule 1 is considered to contain the principlesof adjudicatory jurisdiction of the English courts in transnationalsituations. The judge acknowledged that under Order 11 Rule 1the plaintiff has a heavier burden of proof than a defendantseeking a stay. In fact, the judge should have said that adefendant seeking a stay in compliance with a choice of forumclause has no burden at all. He merely produces the agreementand it is up to the plaintiff to prove that it is void or voidable orthat it would be unfair or unjust under the circumstances for the

23. [1970] P. 94.24. [1973] W.L R 349.

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case to be heard by the foreign court. The judge then proceeded togrant leave for notice of the writ to be served abroad principallyon the ground that "the substance is exclusively concerned withthis country." 25 Important to the decision reached was the factthat all the material witnesses were in England and theuncertainty that the Spanish judge would understand the Englishlanguage or English marketing conditions, the latter being aparticularly important issue in the case.

The decision in Evans Marshall creates in the author'sopinion a dangerous precedent. It was up to Evans Marshall & Co.when it entered into the agreement to insert an appropriate choiceof forum clause setting out eventualities that may requiredetermination of the dispute in England. All the factors referred toby the Court were foreseeable eventualities and risks which theplaintiff had decided to either forego or bear in order to get thebusiness.

In the United Kingdom the enforcement of an arbitrationclause depends on whether the agreement which provides forarbitration is a domestic one or not. A domestic arbitrationagreement is an agreement which (1) does not either expressly orby implication provide for arbitration in a state other than theUnited Kingdom; and (2) to which neither party is an individualwho is a national or habitually resident in a state other than theUnited Kingdom nor a corporation incorporated or having acenter of management and control outside the United Kingdom. 26

Domestic arbitration agreements come under section 4(1) ofthe Arbitration Act of 1950.27 The judge may at his discretion stayproceedings concerning a dispute which has been submitted toarbitration by a valid and enforceable domestic agreement. Thecourt must be satisfied that there is no sufficient reason why thematter should not be referred to arbitration. The discretion mustbe exercised judicially, but it will not be readily interfered with onreview. 28 The burden of showing cause why effect should not be

25. Id. at 363.26. Arbitration Act, 1975, § 1(4). See in HALSBURQ'S STATUTES OF ENGLAND,

vol 45, 32 (3rd ed. Continuation vol. 1975) or C. SCHMITrHOFF, INTERNATIONALCOMMERCIAL ARBITRATION, vol. 1, app. 1 at 21 (1974).

27. See in HA.SBURY'S, supra note 26, Arbitration and SCHMITTHOFF, supranote 26, vol. 1, at 433.

28. Charles Osenton & Co. v. Johnston, [19421 A.C. 130.

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given to the agreement to submit is upon the party opposing thestay.

29

In the case of a non-domestic arbitration agreement, if anoriginal party or a party claiming under him applies for a stay ofthe proceedings, the judge must grant the stay unless he findsthat the agreement is null and void, inoperative, or incapable ofbeing performed. The application for a stay must be made beforeany pleadings are delivered and before any other step is taken inthe proceedings. This prerequisite is stipulated in section 1 of theArbitration Act of 197530 which implemented in the UnitedKingdom the United Nations Convention on Recognition andEnforcement of Foreign Arbitration Awards.3 1 Article II of theUnited Nations Convention provides as follows:

1. Each Contracting State shall recognize an agreementin writing under which the parties undertake to submit toarbitration all or any differences which have arisen or whichmay arise between them in respect of a defined legalrelationship, whether contractual or not, concerning a subjectmatter capable of settlement by arbitration.

2. The term "agreement in writing" shall include anarbitral clause in a contract or an arbitration agreement,signed by the parties or contained in an exchange of lettersor telegrams.

3. The court of a Contracting State, when seized of anaction in a matter in respect of which the parties have madean agreement within the meaning of this article, shall, at therequest of one of the parties, refer the parties to arbitration,unless it finds that the said agreement is null and void,inoperative or incapable of being performed.

In 1975, the United Kingdom ratified the United NationsConvention without any reservation. The United Kingdom did notreserve the application of the Convention to only commercialdisputes. It is also noteworthy that Article II of the Conventionwas made applicable to all nondomestic arbitration agreementsirrespective of whether the parties are citizens, residents, are

29. Vawdrey v. Simpson, [1896) 1 Ch. 166; Heyman v. Darwins, Ltd., [1942)A.C. 356, 388.

30. Arbitration Act, 1975, § 1(1).31. See in C. SCHMITrHOFF, supra note 26, vol. 1 at 9.

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incorporated in or have a center of management in a state whichhas ratified the United Nations Convention. It is also immaterialwhether the arbitration is to take place in one of the ratifyingstates. Article 4(2) of the Arbitration Act of 1950 relating toarbitration agreements under the Geneva Protocol of 192332 andwhich also provided for a mandatory stay has now been repealedand superseded by section 1 of the Arbitration Act of 1975. 33

American courts, including both federal and state, havetraditionally been reluctant to recognize choice of forum clauses.Not so long ago, in Carbon Block Export, Inc. v. The S.S.Monrosa,34 an admiralty action in rem for cargo damage, thecourt of first instance and the Court of Appeals of the Fifth Circuitrefused to comply with a clause in the bill of lading submittingdisputes to the in personam jurisdiction of the Italian courts. Thecustomary American view was expressed as follows: "[A]gree-ments in advance of controversy whose object is to oust thejurisdiction of the courts are contrary to public policy and will notbe enforced.135 Scant authority in the other direction36 providedjustification for the cautious rule as expressed in theRESTATEMENT (SECOND) OF CONFLICT OF LAws § 80 (1971) to theeffect that, "the parties' agreement as to the place of the actioncannot oust a state of judicial jurisdiction, but such an agreementwill be given effect unless it is unfair or unreasonable."

The emphasis has since distinctively changed after the 1972Supreme Court decision in The Bremen v. Zapata Off-ShoreCompany.37 The Supreme Court by an eight to one decision in anopinion delivered by Chief Justice Burger upheld a clause in atowage contract, between Unterweser, a German shipowner, andZapata, a Houston-based American corporation, providing thatany dispute be treated before the London Court of Justice.

The difference arose under a transaction completely uncon-nected with the United Kingdom and English law. It concernedthe towage of the Chaparral, an ocean-going, self-elevatingdrilling rig owned by Zapata, from Louisiana to a point offRavenna, Italy. The towage was effected by Bremen, a tug owned

32. Id. at 434.33. Arbitration Act, 1975, § 8(2)(a).34. 254 F.2d 297 (5th Cir. 1958), cert. denied, 359 U.S. 180 (1959).35. Id. at 300-01.36. Cent. Contracting Co. v. Md. Cas. Co., 367 F.2d 341 (3d Cir. 1966); Cent.

Contracting Co. v. C.E. Youngdahl & Co., 209 A.2d 810 (1965).37. 407 U.S. 1 (1972).

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by Unterweser. The damage to the Chaparral which gave rise tothe dispute occurred in international waters in the middle of theGulf of Mexico. Zapata, ignoring the agreement submittingdisputes to the High Court in London brought an action inpersonam against Unterweser and in rem against the Bremen inthe United States District Court in Tampa, Florida. The districtcourt rejected the defendant's plea to dismiss the action or to staythe proceedings holding that the forum non conveniens doctrinedid not apply. On appeal, a divided panel of the court of appealsaffirmed and on rehearing en banc the panel's opinion wasadopted, with six of the fourteen judges dissenting. In themeantime, Unterweser had brought an action in the High Court ofEngland alleging breach of contract by Zapata. The EnglishCourt of Appeal unanimously held that the choice of forum clausewas enforceable unless it was shown that it was not "fair andright."38

An important feature of the case was that trial before theHigh Court would lead to the application of an exculpatory clausethat would excuse Unterweser from liability whereas trial in theUnited States would not enforce the exculpatory clause as beingcontrary to public policy.

In The Bremen, a most internationally minded decision, theUnited States Supreme Court held that the choice of forum clauseshould be enforced and that the burden of proof was on Zapata toshow that, "trial in the contractual forum will be so gravelydifficult and inconvenient that he will, for all practical purposesbe deprived of his day in court. Absent that, there is no basis forconcluding that it would be unfair, unjust or unreasonable to holdthat party to his bargain."39

Even though, strictly speaking, the Bremen decision appliesto federal courts sitting in admiralty, it has been generally hailedas laying down the proposition that there is a strong presumptionin favor of a choice of forum with regard to all commercialcontracts and that the heavy burden is on the defendant to showthat the clause is unreasonable. 40

38. The Chaparral, [1968] 2 Lloyd's List L.R. 158 (C.A.).39. 407 U.S. at 18.40. Becker and Collins, The Chaparral/Bremen Litigation: Two Commentar-

ies, 22 INT'L & COMP. L.Q. 329 (1973); Costello, The Enforcement of ForumSelection Provisions in International Commercial Agreements, 11 COLUM. J.TRANSNAT'L L. 449 (1972); Leflar, The Bremen and the Model Choice of Forum Act,6 VAND. J. TRANSNAT'L L. 375 (1973); Nadelmann, Choice-of-Court Clauses in the

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The author agrees with the view expressed 4' that the Bremendecision gives judicial support to the Model Choice of Forum Actwhich was adopted by the National Conference of Commissionerson Uniform State Laws. 42 Section 1 of the Model Choice of ForumAct provides that it applies to interstate and transnationalconflicts. Section 2 deals with assumption of jurisdiction incompliance with a choice of forum clause and states thatsubmission will be accepted provided the court is reasonablyconvenient and the defendant has been properly served. Thesubmission will only be declined if the court has no power underthe law of the state to entertain the action, or if the agreementregarding the place of the action was obtained by misrepresenta-tion, duress, abuse of economic power, or other unconscionablemeans. Section 2 states the law in exactly the same manner that itwas defined and applied by the English Court of Appeal in theUnterweser case.43 Section 3 of the Model Choice of Forum Actdeals with derogation. It provides that if an action is brought in acourt in derogation of a choice of forum clause,

[T]he court will dismiss or stay the action, as appropriate,unless(1) the court is required by statute to entertain the action;(2) the plaintiff cannot secure effective relief in the other

state, for reasons other than delay in bringing the action;(3) the other state would be a substantially less convenient

place for the trial of the action than this state;(4) the agreement as to the place of the action was obtained

by misrepresentation, duress, the abuse of economicpower, or other unconscionable means; or

(5) it would for some other reason be unfair or unreasonableto enforce the agreement.

United States: The Road to Zapata, 21 AM. J. CoMP. L. 124 (1973); Reese, TheSupreme Court Supports Enforcement of Choice-of-Forum Clauses, 7 INT'L LAW.530 (1973).

41. Leflar, supra note 40.42. HANDBOOK OF THE NATIONAL CONFERENCE OF COMMISSIONERS ON

UNIFORM STATE LAWS 219 (1968). The Model Act follows closely the HagueConvention on the Choice of Court which was signed at the Tenth Session of theHague Conference on Private International Law. This is now open to ratification.The United States abstained in the vote which approved the Convention. See thetext of the Convention in 13 AM. J. CoMp. L. 629 (1964).

43. The Chaparral, [1968] 2 Lloyd's List L.R. 158 (C.A.).

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The Model Act closely reflects the present position ofAmerican law with regard to choice of forum clauses subject totwo possible qualifications. The first qualification concerns thestatus of the law in New York. In Lev v. Aamco AutomaticTransmissions,4 the court assumed jurisdiction contrary to aclause in a franchise agreement choosing a Pennsylvania forumand applied New York law. Referring to New York law as bindingon a federal court sitting in a New York district it held that NewYork had not joined the trend in enforcing choice of court clauses.Lev was decided before the Bremen case; nevertheless, that courtdisregarded well-known decisions in which choice of forumclauses were enforced. 45

The second possible qualification regards choice of forum andchoice of law clauses in bills of lading or other documents of title.The preamble to the United States Carriage of Goods by Sea Act(COGSA)46 provides as follows:

Be it enacted by the Senate and House of Representativesof the United States of America in Congress assembled, Thatevery bill of lading or similar document of title which isevidence of a contract for the carriage of goods by sea to orfrom ports of the United States, in foreign trade, shall haveeffect subject to the provisions of this Act.

Section 13 of COGSA reiterates the applicability of the Act to allcontracts as described in the preamble.

It was held in Indussa Corp. v. S.S. Ranborg47 that theCOGSA provisions forbid an American court from a holding thatmight cause a bill of lading covering an ocean shipment to or fromthe United States to be subjected to foreign rather than Americanlaw in litigation. The view has also been expressed that thepreamble to the Act contains a conflict of laws rule that an oceanbill of lading to or from a port of the United States must always besubject to COGSA even if it contains a clause providing that a lawother than American law applies. 48

44. 289 F. Supp. 669 (E.D.N.Y. 1968).45. See the cases referred to supra note 36.46. 46 U.S.C. § 1300 et seq. (1970).47. 377 F.2d 200, 203 (2d Cir. 1967) (en banc).48. Black, The Bremen, COGSA and the Problem of Conflicting Interpretation,

6 VAND. J. TRANSNAT'L. 365 (1973).

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The Indussa case, like Lev, also preceded Bremen. A federalcourt in the exercise of its admiralty jurisdiction is now bound togive effect to the choice of forum clause unless the plaintiff candischarge the heavy onus which is imposed on him and bringhimself within one of the defenses. The fact that the foreign courtwill not apply the United States COGSA thereby excluding orlessening the liability of the carrier contrary to § 3(8) of the Actprovides no convincing argument. Trial of the Bremen case by theHigh Court in England would have led to an application of theexculpatory clauses, yet, the Supreme Court upheld the choice offorum clause. Once the American court decides that the foreigncourt has jurisdiction according to the choice of forum clause itneed not inquire into the American conflict rule; it will be up to theforeign court to follow its own conflict rule and decide whether theU.S. Carriage of Goods by Sea Act applies to the case or not.

The decision in Bremen is to be welcomed not only because ofits international outlook but because it restored an existingimbalance between choice of foreign court clauses and submissionto foreign arbitration. The United States, by ratifying andimplementing in 1970 the United Nations Convention on theRecognition and Enforcement of Foreign Arbitral Awards 49

[hereinafter referred to as the United Nations Convention] hasundertaken the obligation to recognize an agreement to arbitrateunless the agreement is found to be void. ° There is no conceivablereason to have less faith in foreign courts than foreign arbitrators.

A few years after implementation by the United States of theUnited Nations Convention, the United States Supreme Court inScherk v. Alberto-Culver Company,51 by a slender majority of fiveto four, overturned a decision of the Court of Appeals of theSeventh Circuit thereby enforcing a clause which submitteddisputes exclusively to foreign arbitration. The dispute impingedon the sensitive area of application of Section 10(b) of theSecurities Exchange Act of 193452 and Rule 10b-5. 53 The sectionand the rule under it concern misrepresentations as to securitiesand are intended to protect investors. The decision allowingexclusive foreign arbitration was based on the international

49. [1970] 21 U.S.T. 2517, T.I.A.S. No. 6997; 9 U.S.C. § 201 et seq. (1970).50. Convention on the Recognition and Enforcement of Foreign Arbitral

Awards, June 10, 1958, art. II, 330 U.N.T.S. 38.51. 417 U.S. 506 (1974).52. 15 U.S.C. § 78j et seq. (1970).53. 17 C.F.R. § 240.10b-5 (1951).

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character of the agreement. The agreement was between Scherk, aGerman citizen residing in Germany and Alberto-Culver, acorporation organized in Delaware with publicly held stock listedon the New York Stock Exchange and headquarters in Illinois.The contract concerned the acquisition by Alberto-Culver of twocorporations in Germany and one in Liechtenstein which wereowned by Scherk together with all their rights to trademarks incosmetics. The only contact with the United States was thatAlberto-Culver was organized and based in the United States andthat the agreement was initially negotiated in the United States.The agreement provided for settlement of disputes exclusively byarbitration according to the rules of the International Chamber ofCommerce in Paris, France. It also provided that it was to begoverned by the law of Illinois.

Alberto-Culver disregarded the arbitration clause and broughtan action in the district court in Illinois to rescind the contractand recover damages. Rescission was sought on the ground thatScherk had misrepresented the trademarks as being unencum-bered thereby violating section 10b-5. The court distinguished itsprevious decision in Wilko v. Swan,54 on the ground that the Wilkocase dealt with a domestic and not an international situation and,therefore, came within the reach of U.S. securities regulation.Unfortunately, the court did not have to face the issue whether theUnited Nations Convention of its own force would requireenforcement of the agreement to arbitrate.5 5 Article II of theUnited Nations Convention requires enforcement of an agreementto arbitrate by an American court (whether federal or state) unlessthe court "finds that the said agreement is null and void,inoperative or incapable of being performed."

The minority opinion delivered by Justice Douglas relied onthe effect of § 29(a) of the Securities Exchange Act of 1934 whichmakes agreements to arbitrate liabilities void. The agreement ofthe parties was to be governed by Illinois law and Article II of theUnited Nations Convention provides that void agreements toarbitrate are unenforceable. Article V(2) of the United NationsConvention further provides that recognition or enforcement of anaward may be refused if the difference is not arbitrable or on

54. 346 U.S. 427 (1953).55. Scherk, 417 U.S. at 520-21. The majority opinion considered the United

Nations Convention merely in a footnote and observed that it provided strongpersuasive evidence of congressional policy consistent with the opinion.

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grounds of public policy. However, enforceability of the award andenforceability of the agreement to arbitrate are not linked in theConvention.56 Non-arbitrality of the dispute or public policyconsiderations may prevent the enforcement of a foreign awardbut these factors are not related to the enforceability of theagreement to arbitrate. The minority opinion also raised a matterwhich will become increasingly important in the near future, i.e.,the impact of internal regulatory legislation on the conduct oftransnational corporations.

The decisive factor which weighed heavily with the majoritywas that disregard of an arbitration clause in an internationalagreement with a defendant whose assets were outside thejurisdiction would amount to an exercise in futility. Effectivenessis one of the most important considerations in the formulation of apragmatic conflict rule. It is clear from the majority opinion thatthe Justices were swayed by the complications that could havearisen if the court refused to enforce the arbitration clause; Scherkcould have easily sought and obtained the assistance of theFrench courts.

The effect of the decision in Scherk is important as well in thearea of antitrust. The view that securities regulation and antitrustare matters of public interest is incontrovertible.57 On the otherhand, they both raise the problem of effectiveness in connectionwith truly international situations. While matters dealing with thecriminal or administrative aspects of securities regulation andantitrust are not arbitrable, matters relating to validity orrescission of an international business contract cannot escape theeffectiveness of an arbitration clause. Whether a party is entitledto raise as a defense the invalidity of an agreement or clausebecause it allegedly violates an antitrust provision is a matterwhich should be left to the arbitrator chosen by the parties.

The United States, as mentioned earlier, has ratified theUnited Nations Convention on the Recognition and Enforcementof Foreign Arbitral Awards, but with the reservation that it willonly apply to differences arising under a commercial relationship,whether contractual or not. This is implemented by § 202 of theUnited States Arbitration Act58 which provides as follows:

56. Id. at 530.57. Nissen, Antitrust and Arbitration in International Commerce, 17 HARV.

INT'L J. 110 (1976).58. United States Arbitration Act, 9 U.S.C. § 202 (1970).

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An agreement or award arising out of such a relationshipwhich is entirely between citizens of the United States shallbe deemed not to fall under the Convention unless thatrelationship involves property located abroad, envisagesperformance or enforcement abroad, or has some otherreasonable relation with one or more foreign states. For thepurpose of this section a corporation is a citizen of the UnitedStates if it is incorporated or has its principal place ofbusiness in the United States.

The Draft Convention between the United Kingdom and theUnited States on the Reciprocal Recognition and Enforcement ofJudgments in Civil Matters renders support to choice of court andchoice of arbitration clauses. Article 6(b) deals with derogationand provides as follows:

Recognition or enforcement of a judgment is not required bythis Convention if: (b) the judgment was given in proceedingsbrought in violation of an agreement between the parties tothe original proceedings giving exclusive jurisdiction to acourt or other authority, or to an arbitral tribunal; ....

Conversely, Article 10(d) of the Draft Convention providesthat a judgment given by a court which assumed jurisdictionpursuant to a choice of forum clause will satisfy the jurisdictionalrequirements of a court in the United States or United Kingdom,as the case may be, in which recognition or enforcement is beingsought. The only prerequisites are: (1) that the defendant was notacting pursuant to a statutory requirement; (2) that the agreementto submit was express and in writing or confirmed in writing; and(3) that the choice of forum pertain to present or future disputesregarding a specified legal relationship. The only prerequisite thatrequires some explanation is that the submission was not incompliance with a statutory requirement. Its purpose is to avoidlegislative provisions compelling a person to submit to localjurisdiction. By the use of such a device a state could extend thejurisdiction of its courts beyond the proper limits.

II. THE EUROPEAN COMMUNITY APPROACH

A. Choice of Law Clauses

Europe for the most part has traditionally accepted theautonomy of the parties to choose the law governing contractual

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obligations.5 9 However, there was much talk about the influence ofa planned economy on the free choice by the parties. One wouldhave thought that the change from economic laissez faire to stateownership in the East with a mixed and planned economy invarying degrees elsewhere, excluding the United States, wasbound to affect the autonomy of the parties. Yet, the evidencepoints the other way. If anything, the United States adhered tothe law where the contract was made. State enterprises in EasternEurope and the Soviet Union, in their thirst for technology, havebeen prepared to submit their agreements to a law unconnectedwith the transaction (e.g., Swedish law or the Swiss law ofobligations).

A thorough analysis of existing trends with reference todecided cases was undertaken within the well informed andresourceful atmosphere of the World Bank and reveals thatautonomy still prevails. 60 Complete party autonomy is expressedin Article 2 of the Hague Convention on the Law Applicable to theSales of Goods of 1955.61 The European Community's DraftConvention on the Law Applicable to Contractual Obligations 62

provides in Articles 3 and 4 that the law governing contractualobligations is the law either expressly or impliedly chosen by theparties. It is only in the event of lack of choice that the law withwhich the contract is most closely connected applies. The publicpolicy corrective which excludes the application of the normally

59. The Institut de Droit International resolved as early as 1908 that the lawexpressly chosen by the parties should apply; See 22 ANNUAIRE DE L'INSTITUT DEDROIT INTERNATIONAL 289-292 (1908). Article 7 of the Polish law entitled thePrivate International Law of 1926 provided for a limited choice out of five possiblelaws (law of nationality, law of domicile, lex contractus, lex solutionis or the law ofthe situation of a thing.) Article 25 § 1 of the 1965 Polish law requires only someconnection between the chosen law and the transaction; See A. MAKAROV,GRUNDRIG DES INTERNATIONALEN PRIVATRECHTS 123-25 (1970). The Greek CivilCode in 1940 provided in Article 25 that contractual obligations are governed bythe law chosen by the parties and failing a choice by the law which according toall the particular circumstances is suited to the contract.

60. G. DELAUME, TRANSNATIONAL CONTRACTS, vol. 1, § 1.01, and generally§§ 4.01-4.06 (1976); See also H. BATIFFOL, LES CONFLICTS DE Lois EN MATIkRE DECONTRATS (1938); A. TOUBIANA, LE DOMAINE DE LA LoI DU CONTRAT EN DROITINTERNATIONAL PRIV-(1972).

61. See text in G. DELAUME, supra vol. 2, app. I. The Convention which iseffective was ratified by a number of Western and Northern European countries.

62. Batiffol, Project de convention C.E.E. sur la loi applicable aux obligationscontractulles, 11 REVUE TRIMESTRIELLE DE DROIT EUROP19EN 181-86 (1975).

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governing law has been applied sparingly to contract cases.6 3 Ithas even been said that the French concept of fraude 4 la loiwhich is intended to prevent the evasion of mandatory provisionsby the choice of an unconnected law or by the creation of anartificial connection was mainly applied to cases not dealing withcontractual obligations. 64 Although there are no leading Frenchcases dealing with the application of fraude & la loi to interna-tional commercial agreements, in Continental Europe the influenceof learned opinion (the "doctrine") on the application of the law isconsiderable. It is particularly so in the sphere of privateinternational law. The argument in favor of the application offraude &t la loi is most convincing65 and is comparable to theEnglish concept of application of mandatory provisions. The twoinfluences are bound to have effects in Europe and may findfertile ground in the United States where federal and state courtshave never given their full-hearted support to free choice. Thecorrective of evasion will preserve as a rule freedom of choice andin exceptional circumstances, will provide protection for the publicinterest without the need to resort to public policy. Furthermore, itwill find support in the increasing application of internationalstandards of conduct and international guidelines to transna-tional corporations and the transfer of technology. 66

B. Choice of Forum Clauses

Common jurisdictional rules acceptable to the six originalmember states of the European Community are expressed in theConvention on Jurisdiction and the Enforcement of Judgments in

63. G. DELAUME, supra vol. 1, at § 4.07.64. Id. vol. 2 at § 10.06.65. B. AUDIT, LA FRAUDE A LA Loi §§ 12, 15, 167, 219, 237 (1934); H. BATIFFOL,

supra note 60, at §§ 61-71; H. BATIFFOL/LAGARDE, DROIT INTERNATIONAL PRIV9,vol. II at 221 (1971).

66. OECD Communique of June 22, 1976, on Independence, Development Co-operation, and Strategy for Sustained Economic Expansion; Declaration onInternational Investment and Multinational Enterprises with Annexed Guidelinesof June 21, 1976, and Decisions of the OECD Council of June 21, 1976, reproducedin 15 I.L.M. 961 (1976); Drafts of an International Code of Conduct on Transfer ofTechnology by Group B and the Group of 77 within the framework of UNCTAD,reproduced in 14 I.LM. 1333 (1975), and criticized by the author as to theapplicable law in Zaphiriou, An International Code of Conduct on Transfer ofTechnology, 26 INT'L & COMP. L. Q. 210 (1977).

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Civil and Commercial Matters67 [hereinafter the EuropeanConvention]. It was ratified by the six states and became effectiveFebruary 1, 1973. The new member states (Denmark, Ireland,Norway and the United Kingdom) are required to accede to theConvention under the Treaty Establishing the European Eco-nomic Community and the Act of Accession.68

Article 17 of the European Convention recognizes choice offorum clauses submitting disputes to the jurisdiction of the courtof a Contracting State if at least one of the parties is "domiciled"in one of the Contracting States. The definition of domicile is leftto the law of the court which is seized of the matter.69 Whether aperson (either natural or legal) is domiciled in another Contract-ing State is determined by the law of that Contracting State.7 0 Anassociation is domiciled where its "seat" is and the seat isdetermined according to the private international law rules ofeach Contracting State.71

A comparative analysis of rules for the determination ofdomicile and the seat of an association is outside the scope of thisarticle. Divergent views as to domicile or residence of individualsand associations between member states and particularly betweenIreland and the United Kingdom (the Common Law group) andthe other member states (the Civil Law group) will provetroublesome in this and other topics. For the purpose of this articleit will suffice to say that "domicile" means having a place ofresidence or place of business and that "seat" is the place wherean association has its center of management and control. Thereare several indications that future interpretations will tend toadopt the above definitions as common denominators leading as

67. 15 J.D. COMM. EUR. (No. L 299) 32 (1972). The references are to the Frenchtext as there is yet no official English translation. See for a note on theConvention, Zaphiriou, The EEC Convention on Jurisdiction and Enforcement ofJudgments, 1969 J. Bus. L. 74.

68. Treaty Establishing the European Economic Community, March 25, 1957,art. 220, 298 U.N.T.S. 11; The United Kingdom, Denmark, Norway and Irelandjoined the European Economic Community by the Treaty Concerning theAccession to the European Economic Community and to the European AtomicEnergy Community as well as the Act Concerning the Conditions of Accession andthe Adjustments to the Treaties, art. 3(2), January 22, 1972, Office for OfficialPublications of the European Communities: Luxembourg, 1973.

69. European Convention, art. 52.70. Id. art. 52(2).71. Id. art. 53.

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far as possible to uniform solutions. It may be assumed that thesuggested definitions will be accepted by a court in which anaction is filed pursuant to a choice of forum clause or by a courtwhich is asked to dismiss the suit for lack of jurisdiction on theground that the dispute was submitted by the parties to theexclusive jurisdiction of another court.

In addition to domicile by one of the parties in a ContractingState, Article 17 provides for two further requirements: (1) theagreement must be in writing or if oral it must be confirmed inwriting; and (2) the submission can apply to present or futuredisputes which relate to a particular legal relationship (e.g.,arising under or in connection with a particular contract.)

In light of the above analysis, the Common Market subsidiaryor even possibly the Common Market branch of an Americancorporation which submits disputes to the exclusive jurisdiction ofa court in one of the Contracting States can invoke Article 17 ofthe European Convention and insist that the chosen court hasexclusive jurisdiction. The domicile of the other party is immate-rial. The European Convention, however, provides only minimumjurisdictional standards to be followed by all Contracting States.Beyond those standards each Contracting State applies its ownrules, which, in addition to the requirements of Article 17, must besatisfied in order for the court to acquire jurisdiction. Choice ofcourt clauses between non-residents are generally enforceable inevery member state72 with the sole exception of Italy.73 There,choice of forum clauses are subject to more stringent limitationsrelating to the nationality, domicile and residence of the parties ordepending upon whether the obligation is foreign.

The European Convention provides for two exceptions to theenforcement of a choice of court clause which are to apply to allpersons irrespective of domicile. The first exception concerns theouster of the jurisdiction of a court of a Contracting State whichhas exclusive jurisdiction because of the subject matter of thedispute, and the second concerns contracts of adhesion.

72. G. DELAUME, supra vol. 1, at § 8.11.73. Art. 2 of the Italian Code of Civil Procedure provides that an agreement to

submit to a foreign jurisdiction in derogation of the jurisdiction of an Italian courtis only enforceable if it relates to a foreign obligation or to a dispute between twoaliens or one alien and a non-resident Italian. The above provision is notapplicable to natural or legal persons having a place of residence, place ofbusiness, or a center of management and control within the European Community.See also art. 3(2) of the European Convention.

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Article 16 of the European Convention provides that thefollowing courts have exclusive jurisdiction as to certain matters:

(1) The courts of the Contracting State in whichimmovable property is situated as to rights in, or tenanciesof, the immovable property;

(2) The courts of the Contracting State in which a legalperson or association has its center of management andcontrol as to matters relating to the existence or dissolutionof a legal person or association and as to the powers of itsofficers and directors;

(3) The courts of the Contracting State in which apublic register is kept as to matters relating to the validity ofentries in the register; and

(4) The courts of the Contracting State in the territoryof which the filing or registration for a patent, trademark,design, utility model or other similar right requiring filing orregistration was applied for, or effected, or deemed to havebeen effected according to the terms of an internationalconvention, as to matters of registration or validity of thesaid rights.

All of the above matters cannot be submitted by agreement to thejurisdiction of another court.

As to contracts of adhesion, only present disputes arisingunder an insurance policy, a conditional sale or a lease-purchasing agreement can be submitted to the jurisdiction of aparticular court. Future disputes can only be submitted to thejurisdiction of a particular court at the option of the assured or ofthe purchaser or may be submitted to the jurisdiction of a courtwhich is within the territory in which both parties are domiciled. 74

All member states of the European Community with theexception of Ireland have ratified the United Nations Conventionon the Recognition and Enforcement of Foreign ArbitralAwards.75 France has adopted the United Nations Conventionwith the reservation that the Convention will apply to differencesarising under a relationship, whether contractual or not, which isconsidered to be commercial under French law. Belgium, Den-mark, the Federal Republic of Germany, France and theNetherlands recognize and enforce only awards made in the

74. European Convention, arts. 7-12, 14, 15.75. See updated list in C. SCHMITTHOFF, supra vol. 1, at 9.

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territory of another Contracting State. It is, therefore, probablethat in any of these countries a court when seized of a matter inrespect of which the parties have made a valid agreement toarbitrate, will only refer it to arbitration pursuant to Article II ofthe United Nations Convention if the arbitration is to take placein a state which has ratified the United Nations Convention. 76

III. CONCLUSIONS

Choice of law clauses are generally upheld unless they arecontrary to public policy or attempt to evade mandatoryprovisions of the law with which the contract is most substan-tially connected.

Clauses submitting differences to the exclusive jurisdiction ofa particular court or of the courts of a particular state aregenerally upheld in the United States and in the United Kingdomsubject to three qualifications: (1) New York has tended to lag injoining the trend; (2) American or Scottish courts may declinejurisdiction on the ground that it is a forum non conveniens; and(3) a choice of forum clause in the United Kingdom and the UnitedStates will be given no effect if the defendant can prove that trialby the chosen court would under the circumstances be unfair orunjust.

The picture in the European Community is less clear and willaffect the United Kingdom when the European CommunityConvention on Jurisdiction and the Enforcement of Judgments inCivil and Commercial Matters becomes effective in the UnitedKingdom. Clauses submitting differences to the exclusive jurisdic-tion of a particular court or of the courts of a particular State aregenerally upheld subject to two exceptions: (1) they cannot oustthe jurisdiction of a court of a Contracting State (i.e., the sixoriginal member states of the European Community and eventu-ally all member states) which has exclusive jurisdiction because ofthe subject matter of the dispute; and (2) in the case of contracts ofinsurance, conditional sales and lease-purchasing agreements,choice of court clauses are subject to important limitations.

The United Kingdom, the United States and the memberstates of the European Community, with the exception of Ireland,are bound by Article II of the United Nations Convention on theRecognition and Enforcement of Foreign Arbitral Awards to

76. Article II of the United Nations Convention on the Recognition andEnforcement of Foreign Arbitral Awards is discussed supra, p. xx.

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dismiss or stay proceedings which are in violation of a validagreement submitting the difference to the jurisdiction of anarbitral tribunal. The dismissal or stay must be requested by aparty to the proceedings right at the outset and before any otherstep is taken. The United Kingdom requires the agreement to benon-domestic in the sense that it submits the difference toarbitration outside the United Kingdom and that one of theparties is an individual habitually resident in a foreign State or acorporation incorporated or having its center of management andcontrol in a foreign State. The United States requires thedifference to arise under a relationship which whether contractualor not is considered to be commercial. It also requires that thedifference exist not solely between citizens of the United States orcorporations incorporated or having their principal place ofbusiness in the United States unless it involves property locatedabroad, or has some other reasonable relation with one or moreforeign states.

In the European Community, France has also limited theapplication of the United Nations Convention to differences thatrelate to a commercial relationship. Belgium, Denmark, theFederal Republic of Germany, France and the Netherlands haveadopted the Convention on a basis of reciprocity and it istherefore probable that an agreement providing for arbitration ina foreign country which has not adopted the United NationsConvention would not fall under Article II of the Convention.